Counterparty risk and CVA survey

The financial crisis has revealed severe shortcomings in corporate governance. When most needed, corporate governance often failed to provide the checks and balances that companies need in order to cultivate sound business decisions.

Background

Counterparty risk is a topic that has been elevated to the forefront of the front office, risk management and regulatory agendas following mark-to-market volatility and defaults over the global financial crisis.

Universal acknowledgement of credit valuation adjustment (CVA) and debt valuation adjustment as essential components within the fair-value of derivatives and securities financing transactions has reinforced the importance of counterparty risk management across a much broader spectrum of financial services firms.

This survey includes contributions from 21 participating banks and aims to take stock of the industry’s response to the numerous theoretical issues and operational challenges raised as a result of the evolving regulatory, accounting and risk management environment.

Key findings

Among the key findings of this survey were:

Perceived capital savings that could come from leveraging the advanced CVA approach is incentivising a new set of respondents to pursue advanced ‘internal model method’ approval from their respective supervisory bodies.

A large majority of respondents are finding it difficult to fully model collateral over the entire duration of a trade, although this is fast becoming an urgent priority for capital efficiency purposes and to price instruments correctly.

Virtually all participants acknowledge the necessity of a funding valuation adjustment, even if the accounting standard setters appear to be less convinced.Among the key findings of this survey were:

Perceived capital savings that could come from leveraging the advanced CVA approach is incentivising a new set of respondents to pursue advanced ‘internal model method’ approval from their respective supervisory bodies.

A large majority of respondents are finding it difficult to fully model collateral over the entire duration of a trade, although this is fast becoming an urgent priority for capital efficiency purposes and to price instruments correctly.

Contacts

Partner | Risk & Capital Management

Jean-Philippe is a partner within the advisory and consulting department. Over the last 15 years, he has specialised in risk management for financial institutions, with a focus on regulatory capital r... More

Partner | Capital Markets/Financial Risk Leader

Xavier is a partner within the advisory and consulting department and is the head of the Capital Markets practice in Luxembourg. As a market and credit risk specialist, he has been leading various ass... More

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.